How Does an Increase in Government Transfer Payments Affect Aggregate

question 39

Multiple Choice

How does an increase in government transfer payments affect aggregate demand?

• A)It has the same effect as a tax increase, which lowers AD with a larger multiplier than a spending decrease.
• B)It has the same effect as a tax cut, which increases AD but with a smaller multiplier than a change in spending.
• C)It has the same effect as a spending increase, which increases AD with a larger multiplier than a tax cut.
• D)It has the same effect as a spending decrease, which increases AD with a larger multiplier than a spending decrease.

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Definitions:

Returns To Scale

In production theory, the change in output resulting from a proportional change in all inputs; can be increasing, constant, or decreasing.

Input

Resources used in the production process of goods and services, including raw materials, labor, and capital.

Decreasing Returns

A concept in economics where each additional unit of input results in a progressively smaller increase in output, often observed in production processes.

Marginal Product

The additional output that is produced by using one more unit of a particular input while holding other inputs constant.